Stock Market Logic Series #13
The double bottom and double top patterns are among the most powerful and reliable indicators in technical analysis. These formations provide traders with insights into potential trend reversals, making them valuable tools in a trader's arsenal. However, one must approach these patterns with patience and discipline to truly harness their power. Statistically, the price often does not move decisively on the first attempt, and waiting for confirmation can significantly improve the likelihood of a successful trade entry. A double bottom pattern occurs when a stock's price hits a low point, rebounds, and then retests the same low point before moving upward. This pattern suggests that the selling pressure is diminishing, and buyers are starting to take control. Conversely, a double-top pattern forms when the price reaches a high point, retraces, and then retests the same high point before moving downward. This indicates that buying pressure is waning, and sellers are gaining the upper hand. One of the key aspects of trading these patterns is patience. It's essential to wait for the price to confirm the pattern before entering a trade. For a double bottom, this means waiting for the price to break above the resistance level formed between the two lows. For a double top, it involves waiting for the price to break below the support level formed between the two highs. By waiting for these confirmations, traders can avoid false signals and increase their chances of entering a profitable trade. This is because you will not fall into the trap of HINDSIGHT backtesting and it is clear that an M or W happened. HINDSIGHT backtesting is that you have the hindsight advantage when you backtest, but you don't have it when you do REAL-TIME trading. FYI, TradingView gives you the ability to do a reply of bars ... This gives you the dramatic advantage of seeing if your trading rules are REAL-TIME approved. Patience is particularly crucial because, statistically, the price often makes multiple attempts to break through these key levels. Impatient traders who jump in too early may find themselves caught in a false breakout or worse an "imaginary breakout", resulting in losses. By waiting for the price to confirm the pattern, traders can ensure that the trend reversal is genuine and increase their odds of success. Imaginary breakout is when you imagine the price will do what you believe it will do, and it never does it. This cognitive error causes you to enter trades you would have never taken when you backtested your strategy. John Bollinger, the creator of the Bollinger Bands, recognizes the power of double bottom and double top patterns. Bollinger Bands are a popular technical analysis tool that measures market volatility and provides a dynamic range within which prices are likely to move. When combined with double bottom and double top patterns, Bollinger Bands can further enhance a trader's decision-making process. TradingView also functions as the best Trading Journal , I have my whole series of stock market logic ideas which I always refer back to. Also, you can add inside the journal idea a picture of the chart that is automatically stored and displayed on the TradingView ideas. What you see on the chart is a confirmed validated M-pattern (the pink is the manifestation of the pattern), then after it you see a period of "NOT LONG". This gives you a "TELL" that the probability of the rallies... they are fake. Then, you see a confirmed W-pattern (the pink is the manifestation of the pattern), then after it, you see a period of "LONG". This gives you a "TELL" that the probability of the corrections... they are fake. When YOU, yes YOU, "KNOWS" statistically, when a fake pricing happens... this is a very lucrative business opportunity...
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